DEALS OF THE YEAR: Up in the world

Global volatility did little to disturb the upward momentum of Latin capital markets in 2012. As our Deals of the Year Awards show, their importance and appeal have never been so great

Despite the continued uncertainty looming over the global
economy, Latin American issuers have much to celebrate in 2012
– and much to be optimistic about in 2013.

The winners of this year’s LatinFinance Deals
of the Year exemplify the increasing importance and appeal of
Latin American assets and the growing size and innovation of
transactions. Although this is a theme that has been emerging
for many years, it is only in the last two that the region has
truly come to be seen by investors as more than just a
diversification play.

Large and sophisticated debt capital markets transactions
were the highlights of this year’s awards. Indeed,
several deals that were considered ordinary in this
year’s awards period – from October 1,
2011 to September 30, 2012 – would have been regarded
as groundbreaking just a few years ago. High-grade issues have
come at lower than ever spreads attracting a wide range of
investors. High-yield debutants have popped up from unexpected
corners. Cemex pushed a wall of debt back three years, with
overwhelming acceptance from the market. Bolivia –
with its first international offering since the 1920s
– in October issued a bond with a yield of under
5%.

Appetite from the buy side has been immense. "There has been
a lot of inflow from institutional investors this year," says
Blaise Antin, head of TCW’s sovereign research
team. "We don’t think that’s going to
change in 2013."

The volume of straightforward bond issuance
shouldn’t distract from the innovations that are
still appearing: Banco do Brasil has led the emerging markets
in preparing its borrowing for Basel III regulations; an issuer
that is not even the biggest bank in Panama raised the first
covered bond in the emerging markets outside of Korea; and a $7
billion four-tranche bond sale is not easy, even for
Petrobras.

"As we become a more mainstream asset class we see a lot of
crossover investors embracing emerging markets, and they want
things in a nice standardized package, recognized, and liquid,"
says Chris Gilfond, co-head of LatAm DCM at Citi. "There has
been a huge surge in volume and while that defines the bulk of
the business, within that there is still a bit of innovation
taking place."

"Emerging market debt is eventually going to look a lot like
the US fixed income market," Antin says. "There will be a lot
of hard currency debt, corporate debt and local currency debt,
and you’ll have a number of different strategies
that segment the asset class."

The local markets have been fertile grounds for testing new
models also.

Pemex and Peru both inaugurated global depositary notes for
all-in-one global-local currency and domestic market sales.
América Móvil later went one better with such a
seamless sale within a single security. In Brazil, lower rates
drove record local bond issuance, Volkswagen’s
Driver One broke new ABS ground and the infrastructure
debenture class may have finally gotten off the ground towards
the end of 2012.

Sovereigns didn’t struggle, with
sub-investment-grade names getting rock-bottom rates and the
highest rated names engaging in sophisticated liability
management transactions that would be the envy of many
developed-world nations. Mexico even entered the Japanese
market without a guarantee.

Bankers, however, point out that with increased success come
increased investor and issuer expectations. A deal may get 17
times book one day –as did Mexichem’s
– but find the next day the window has closed.

Though today’s costs in the bond market are
hard to beat, LatAm projects and companies again have the loan
market as an option. Several deals coming out in the final
months of 2012 suggest a more robust crop in the future. To the
extent they are able, European, US and Asian lenders want to
lend to solid LatAm credits, such as Ternium. Regional banks
are picking up the slack when these foreigners’
balance sheets don’t allow them to lend.

LatAm assets offer an alternative to the slow growth and
financial ill-health in Europe, the US and Japan. Companies
from across the world are eager to buy into LatAm peers with
healthy balance sheets and sky-high growth potential. They face
more competition than ever from a greater number of growing
LatAm powers. CorpBanca, Cencosud and Grupo Sura are just a few
examples of companies transforming themselves into major
regional players.

"The pipeline is building every day," says Javier Vargas,
co-head of investment banking for Latin America at Credit
Suisse. "Companies are much more open to take advantage of
getting capital and putting it to work and using it to
grow."

Others, such as Mexico’s América
Móvil and Mexichem, have moved to pick up European
operations at rock bottom prices. Moreover, there is still
consolidation ahead in big markets like Brazil and Mexico.

There is even hope for the equity capital markets, a class
severely underperforming its historical levels. Transactions
from Santander México, Cencosud, Cementos Pacasmayo and
Fibra Uno have shown the potential of issuance from Mexico and
the Andean nations. Provided they are ready to come to market,
investors are taking a serious look at companies from these
geographies.

BTG Pactual and Taesa have shown that investors still want
quality names from Brazil. Falling valuations should mean
greater investor interest in the year ahead.

2013 should be a strong year. More high-yield debt issuance,
which was only about 20% of the bond volume in 2012, could be
in the works. A few pulled transactions in late 2012 had people
wondering about a bubble.

"You eventually run up against risk of issuance by issuers
who aren’t very strong, but we
haven’t seen too much of that this year," says
Antin. LatAm high-yield corporates are generally in better
shape than high-yield borrowers elsewhere.

A rerun of the economic conditions in 2012 would not prove
disastrous for Latin American debt issuance.
Europe’s problems may appear set to continue but
last year they had negligible impact on LatAm activity. An
economic hard landing for China now seems less likely than
before, though there is no certainty about this. While near
term fears over the US fiscal cliff have receded, a bitterly
divided Congress will continue to bedevil economic policymaking
in the world’s largest economy – a fact
that could weigh on issuers hoping for a clear market this
year.

But barring a major financial shock, similar levels of
activity are likely in M&A, and more business is expected
in the syndicated loan and equity capital markets –
and perhaps even another record year in DCM.

For now, however, we toast the standouts of 2012. LF

The winners of this year’s LatinFinance Deals
of the Year exemplify the increasing importance and appeal of
Latin American assets and the growing size and innovation of
transactions. Although this is a theme that has been emerging
for many years, it is only in the last two that the region has
truly come to be seen by investors as more than just a
diversification play.

Large and sophisticated debt capital markets transactions
were the highlights of this year’s awards. Indeed,
several deals that were considered ordinary in this
year’s awards period – from October 1,
2011 to September 30, 2012 – would have been regarded
as groundbreaking just a few years ago. High-grade issues have
come at lower than ever spreads attracting a wide range of
investors. High-yield debutants have popped up from unexpected
corners. Cemex pushed a wall of debt back three years, with
overwhelming acceptance from the market. Bolivia –
with its first international offering since the 1920s
– in October issued a bond with a yield of under
5%.

Appetite from the buy side has been immense. "There has been
a lot of inflow from institutional investors this year," says
Blaise Antin, head of TCW’s sovereign research
team. "We don’t think that’s going to
change in 2013."

The volume of straightforward bond issuance
shouldn’t distract from the innovations that are
still appearing: Banco do Brasil has led the emerging markets
in preparing its borrowing for Basel III regulations; an issuer
that is not even the biggest bank in Panama raised the first
covered bond in the emerging markets outside of Korea; and a $7
billion four-tranche bond sale is not easy, even for
Petrobras.

"As we become a more mainstream asset class we see a lot of
crossover investors embracing emerging markets, and they want
things in a nice standardized package, recognized, and liquid,"
says Chris Gilfond, co-head of LatAm DCM at Citi. "There has
been a huge surge in volume and while that defines the bulk of
the business, within that there is still a bit of innovation
taking place."

"Emerging market debt is eventually going to look a lot like
the US fixed income market," Antin says. "There will be a lot
of hard currency debt, corporate debt and local currency debt,
and you’ll have a number of different strategies
that segment the asset class."

The local markets have been fertile grounds for testing new
models also.

Pemex and Peru both inaugurated global depositary notes for
all-in-one global-local currency and domestic market sales.
América Móvil later went one better with such a
seamless sale within a single security. In Brazil, lower rates
drove record local bond issuance, Volkswagen’s
Driver One broke new ABS ground and the infrastructure
debenture class may have finally gotten off the ground towards
the end of 2012.

Sovereigns didn’t struggle, with
sub-investment-grade names getting rock-bottom rates and the
highest rated names engaging in sophisticated liability
management transactions that would be the envy of many
developed-world nations. Mexico even entered the Japanese
market without a guarantee.

Bankers, however, point out that with increased success come
increased investor and issuer expectations. A deal may get 17
times book one day –as did Mexichem’s
– but find the next day the window has closed.

Though today’s costs in the bond market are
hard to beat, LatAm projects and companies again have the loan
market as an option. Several deals coming out in the final
months of 2012 suggest a more robust crop in the future. To the
extent they are able, European, US and Asian lenders want to
lend to solid LatAm credits, such as Ternium. Regional banks
are picking up the slack when these foreigners’
balance sheets don’t allow them to lend.

LatAm assets offer an alternative to the slow growth and
financial ill-health in Europe, the US and Japan. Companies
from across the world are eager to buy into LatAm peers with
healthy balance sheets and sky-high growth potential. They face
more competition than ever from a greater number of growing
LatAm powers. CorpBanca, Cencosud and Grupo Sura are just a few
examples of companies transforming themselves into major
regional players.

"The pipeline is building every day," says Javier Vargas,
co-head of investment banking for Latin America at Credit
Suisse. "Companies are much more open to take advantage of
getting capital and putting it to work and using it to
grow."

Others, such as Mexico’s América
Móvil and Mexichem, have moved to pick up European
operations at rock bottom prices. Moreover, there is still
consolidation ahead in big markets like Brazil and Mexico.

There is even hope for the equity capital markets, a class
severely underperforming its historical levels. Transactions
from Santander México, Cencosud, Cementos Pacasmayo and
Fibra Uno have shown the potential of issuance from Mexico and
the Andean nations. Provided they are ready to come to market,
investors are taking a serious look at companies from these
geographies.

BTG Pactual and Taesa have shown that investors still want
quality names from Brazil. Falling valuations should mean
greater investor interest in the year ahead.

2013 should be a strong year. More high-yield debt issuance,
which was only about 20% of the bond volume in 2012, could be
in the works. A few pulled transactions in late 2012 had people
wondering about a bubble.

"You eventually run up against risk of issuance by issuers
who aren’t very strong, but we
haven’t seen too much of that this year," says
Antin. LatAm high-yield corporates are generally in better
shape than high-yield borrowers elsewhere.

A rerun of the economic conditions in 2012 would not prove
disastrous for Latin American debt issuance.
Europe’s problems may appear set to continue but
last year they had negligible impact on LatAm activity. An
economic hard landing for China now seems less likely than
before, though there is no certainty about this. While near
term fears over the US fiscal cliff have receded, a bitterly
divided Congress will continue to bedevil economic policymaking
in the world’s largest economy – a fact
that could weigh on issuers hoping for a clear market this
year.

But barring a major financial shock, similar levels of
activity are likely in M&A, and more business is expected
in the syndicated loan and equity capital markets –
and perhaps even another record year in DCM.

For now, however, we toast the standouts of 2012.
LF

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